This presentation has been uploaded by Public Relations Cell, IIM Rohtak to help the B-school aspirants crack their interview by gaining basic knowledge on Finance.

1. Basics on Finance
A webinar by PR Cell, IIM Rohtak for Preparation
for WAT-PI process, Admissions - 2016

2. Discussion Topics
FINANCIAL ACCOUNTING:
 Accounting Principles and Accounting Concepts
 Accounting Policies
 Financial Statements
 Financial Ratios
FINANCIAL MANAGEMENT:
 Procurement and Utilization of Funds
 Cost of Capital
 Role of CFO
 Profit Maximization vs Value Maximization
 Risk and Return

3. Financial Accounting
 “Accounting is the art of recording, classifying, and
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least of
financial character, and interpreting the results thereof.”
- American Institute of Certified Public Accountants (AICPA)
 Accounting is also understood as the systematic and
comprehensive recording of financial transactions pertaining
to a business.
 Accounting is one of the key functions for almost any
business; it may be handled by a bookkeeper and accountant
at small firms or by sizable finance departments with dozens
of employees at larger companies.

4. Accounting Concepts
 There are few basic rules for recording any accounting
transactions
a) Dual Aspect Concept - It must have two sides
b) Money Measurement Concept - It has to be in terms of
money
c) Periodicity Concept - It falls between a specified period
d) Entity Concept – It is specific to a particular entity
e) Conservatism Concept - Future losses to be recorded but
not future gains

5. Accounting Concepts
f) Matching Concept - Expenses related to Incomes only
can be recorded
g) Historical Cost Concept - Assets to be recorded at
purchase price
h) Realisation Concept - Profits to be recorded only when
sale has taken place
i) Materiality Concept - It needs to be material for decision
making
j) Capitalisaiton Concept - Costs related to capital assets
before put to use

6. Accounting Standards
and Assumptions
Accounting Standards issued by ICAI
 31 Active Accounting Standards
 Also converging to IFRS (International Financial Reporting
Standards) – IND AS
Important Accounting Assumptions:
a) Going Concern
b) Consistency
c) Accrual

7. Process of Records
Consists of
a) Profit &
Loss
Statement
b) Balance
Sheet
c) Cash
flow
Statement
Final
Accounts
Helps in
ensuring
that the
entries in a
company’s
book
keeping
system are
accurate in
figures
Trial
Balance
A general
ledger is a
complete
record of
financial
transactions
over the life
of a
company
Ledger
First
recording of
financial
transactions
as they
occur in
time, so that
they can
then be
used for
future
reconciling
Journal
Any
monetary
transaction
for
exchange
Example:
Money
exchanged
for a pen
Transaction

8. Financial Statements –
Profit and Loss Account
 It reports a company's revenues, expenses, and most of
the gains and losses which occurred during the period of
time specified
 Generally prepared for one year period
 The bottom line of this financial statement appears as net
income, which is the net amount of the revenues,
expenses, gains, and losses being reported

10. Financial Statements –
Balance Sheet
 It represents a company's financial position at the end of a
specified date
Assets:
 Businesses need to use assets in order to generate
wealth. Assets are the things that a business owns or
sums that are owed to the business at any one moment in
time
 The business obtains the finance for these assets from
two main source:
 Internally (inside the business) from capital raised
from the business owners (the shareholders in the
case of a company)
 Externally - for example, in the form of loans, and
other forms of finance which needs to be repaid

11. Financial Statements –
Balance Sheet
Liabilities:
 When you set up a business, the business becomes a
legal body in its own right
 Internal finance (shareholders' funds) is owed to
shareholders
 External finance is owed to people outside the
business - liabilities
 The Balance Sheet will therefore balance since in simple
terms this shows that the value of a businesses assets is
financed by the two groups –
 Internal (owner's capital),
 External (liabilities).
 A balance sheet typically appears in a vertical format

13. Financial Statements –
Cash Flow Statement
 A financial statement that shows how changes in balance
sheet accounts and income affect cash and cash
equivalents, and breaks the analysis down to operating,
investing and financing activities
 Management decisions for the next years can be based
on the cash inflows or cash outflows from each individual
activities
 Also it portrays the usage or generation of cash from
which of the following operating, investing or financing
activities

15. Financial Statements – Ratios
 Liquidity Ratio
 Profitability Ratio
 Activity Ratio
 Solvency Ratio
 Leveraging Ratio

16. Financial Management
The theory of Financial Management is the theory of financial decision making
by business firms
It can be described as the study of decisions that every firm has to make
related to financial matters
It is the managerial activity which is concerned with the planning and
controlling of the firm’s financial resources
It can be viewed as proper management of flows of funds in a firm
“Financial Management is concerned with the managerial decisions that result
in the acquisition and financing of short term and long-term credits for the firm”

17. Financial Management –
Procurement of Funds
Sources
of Funds
Equity
Debt
Hire
Purchase
Angel
Financing
Venture
Capital
Commercial
Banks

18. Financial Management – Types
of Capital
Equity Share Capital
Reserves and Surplus
Preference Share
Capital
Long Term Loan Funds
Term Loans
Debentures
Short Term Loan Funds
Bank Overdraft
Credit Limit
Types of
Capital

19. Financial Management – Cost
of Capital
 Cost of Capital is the cost of using funds of the owners or the
creditors (can also be termed as expectation from the
owners)
 Cost of Equity (Ke):
 Dividend Discount Method
 Ke = (D1/P0 )+g
 Capital Asset Pricing Method
 Ke = Rf+ ß *(Equity Risk Premium)
 Factor Model

20. Financial Management – Cost
of Capital
 Cost of Preference Shares
 KPS = (Dividend+(M.V.-N.P.))/(0.5*(M.V.+N.P.))
(M.V.=Maturity Value, N.P.=Net Proceeds)
 Cost of Debt
 Kd = r(1-t)
 Yield to maturity approach and Debt
 Weighted Average Cost of Capital
= (We*Ke + Wd*Kd + WPS*KPS)

21. Financial Management –
Utilization of Funds
Utilization
of Funds
Fixed
Assets
Investment
Current
Assets

22. Role of a CFO
Finance
Accounting
Audit
Treasurer
Controller
Finance
Manager

23. Decisions made by CFO
Investment
Decisions
Long-Term Decisions
Financing
Decisions
Capital Structure Decisions
Dividend
Decisions
Profit Distribution Decisions
Liquidity
Decisions
Working Capital or Short-Term
Decisions

24. Financial Management
Objectives
Profit Maximization
Profit After Tax Maximization
Earning Per Share Maximization
Sales Maximization
Market Share Maximization
Firm’s Wealth Maximization
Shareholder’s Wealth or Value Maximization

25. Basic Axioms of Financial
Management
Money has time value/opportunity cost
Every Financial Decision involves a trade-off between Risk
and Return
Financial Markets are Efficient
Accounting Profits are not relevant for financial decisions.
Profits based on Cash Flows are more relevant
Options have a value

26. Return
Risk
Remember that each Financial
Decisions are evaluated in terms
of
Looking into the
brighter side
Looking into the
darker side

27. Relationship between
Risk and Return
 Can we say that a person who has taken high risk will get
higher return?
 Should a person go for higher risk if he/she has to earn
higher return?
 Should a person be compensated by higher return for
taking higher risk?
 Is it High Risk, High Return?
 Or, Is it High Return, High Risk?

28. Financial Management -
Derivatives
 A derivative is a financial contract which derives its value from
the performance of another entity such as an asset, index, or
interest rate, called the "underlying".
 Futures
 Forwards
 Options
 Put Option
 Call Option
 Swaps
 Interest Rate Swaps
 Currency Swaps
 Commodity Swaps
 Credit Default Swaps

29. Q & A

30. THANK YOU